On Friday 20th April 2018, property investors and buyers from across the country gathered at the London ExCel for the spring edition of the Property Investor & Homebuyer Show. Not only were there hundreds of service providers from across the industry to meet and chat to, delegates were also treated to the Great Landlord’s Debate…
Hosted by Paul Shamplina, the Founder of eviction firm Landlord Action and star of Channel 5 show Bad Tenants, Rogue Landlords, the panel debate covered everything that’s been going on for landlords since the last event.
As Shamplina noted: “There have never been as many changes as now.”
He explained how the heap of regulations being introduced by the Government – pointed out as being 20 new proposals over the last two weeks alone by fellow panellist Kate Faulkner – are encouraging landlords to be more professional, put plans and strategies in place, and put together an exit plan as well.
Shamplina kicked off the debate, asking the panellists: “How do we see the market going at the moment, over the medium-term?”
Eddie Hooker, the CEO of Hamilton Fraser and mydeposits, was quick to kick off, noting the “rhetoric around a broken housing market, challenges for landlords and difficulties faced by housebuilders”. He also highlighted the forecast that, by 2022, 25% of the population will be renting, which will mean for tenants, landlords and letting agents – “this isn’t a negative for you”, he pointed out. At the same time, the ageing population may be passing down their properties to younger people, who could decide to let them out.
“Looking at this from a commercial position: what a wonderful market to be in,” Hooker exclaimed. “There will be more demand for your services as a landlord, so make sure your investment is safe. This is a golden period.”
Peter Littlewood, of the Professional Association for Landlords, had a different perspective. From his smaller landlord members, Littlewood has received many more eviction questions, which he believes shows that “landlords have got to become serious and far more professional. You can’t afford to do it half-heartedly, you’ve got to do it properly”.
However, in a meeting with the Ministry for Housing, Communities and Local Government (which the panellists agreed to abbreviate to MHCLG), Littlewood warned them that they “won’t have any landlords if you continue to treat them like this”. Nevertheless, he insisted to the audience: “You can’t afford to stick your head in the sand. You need to be professional, otherwise you’re not going to stay in business.”
Faulkner, who is the Author of propertychecklist.co.uk, turned the attention to house prices and capital growth.
“Take the price of a house today and the price in 2000, there’s been a 6-10% average annual growth,” she explained. “But when you work your capital growth back to just 2005, it has fallen to 2-3%, and this is expected to carry on.”
In London, she pointed out, we used to see a 7% increase in house prices every year, but now, we’re seeing 7% growth over a five-year period.
“Capital growth won’t be there in the future,” Faulkner warned. She then moved onto rent prices, noting that landlords have been “accused of charging extortionate rent”, but that there is “no evidence whatsoever” of this.
“The reality is, rents rise at less than inflation – according to the Office for National Statistics, they’ve increased by 2% each year, but inflation is at 3% each year,” she said. “You’re giving yourself a pay cut every year!”
Finally, she expressed that landlords and property investors are being seen as part of the problem, as the Government holds a “fundamental belief” that, if you stop buying, “first time buyers will magically be able to buy themselves”. She calculated that, on a realistic 95% loan-to-value mortgage, tenants will actually save £5,000 per year by renting rather than buying.
When Shamplina cut in with the fact that renting is dead money, Faulkner came back to explain: “The dead money they’re charged in rent is equivalent to how much they’d pay in mortgage interest, which is also dead money.”
She believes that it will be another year until the “Government realises that landlords are part of the solution; evictions and homelessness are going up so much because they’re getting rid of landlords. The only tenure for those people, if the landlords are gone, is homelessness.”
Shamplina agreed, highlighting that his company has received 35,000-40,000 instructions from landlords over the past 18 years, with more and more councils telling tenants to stay put in their rental properties before they can be rehoused, due to waiting lists of 20,000-25,000 people. “It’s broken,” he added.
But one member of the audience put forward his belief that the Government wants to go down the build to rent route more.
Shamplina continued this thread, noting that this type of property investor builds lots, keeps the rentals themselves and the tenant appears to have a better letting experience.
“The Government found that the 80-85% of landlords that have one property aren’t providing a good enough service, so it prefers bigger, commercial investors.”
However, Littlewood pointed out that if the Government doesn’t change the taxation of overseas, corporate investors, they’ll leave the UK.
Speaking of taxes, Shamplina went on to the section 24 (or mortgage interest tax relief) changes: “We act for big landlords, and they’re saying that these changes are breaking up their portfolio – they’re selling parts off, which creates cash for the Treasury, but the Government wants longer tenancies and expects first time buyers to snap up these properties, but they haven’t got deposits.”
Faulkner continued: “It’s a difficult situation – the Government won’t back down. It’s backing corporate build to rent, but we have one of the lowest levels of institutional investment in this country. And, in other countries, where they have more corporate investment, they also often have rent controls, which are based on inflation, so it’s happy days for landlords.
“But the Government won’t change their mind – we need to give them a solution that doesn’t embarrass them. We’ve been fighting for a number of years, but build to rent receives the investment from the Government that small landlords need.”
The Great Landlord’s Debate – Spring 2018
“So how will section 24 affect these landlords?” Shamplina asked.
Faulkner responded: “They need to speak to a tax advisor to work out how much money they’ll lose by 2020. They’ll fall flat on their face if they don’t take advice. Once they know what the impact is, they can maximise their rent. So many landlords take tenants on and don’t increase the rent while they’re there – no other business does that. It’s all about understanding the numbers; your finances and objectives are different to everyone else’s.”
Hooker gave a different view: “The Government tried to apply some logic with this; a homeowner paying their mortgage can’t claim mortgage interest relief, so the Government turned it around and didn’t want landlords to be any different, as they’re also getting capital growth.
“So why does the Government want corporate investment? Well, they know where they are, they’re regulated, they have to pay taxes and action is taken if they don’t. With private landlords, some don’t pay taxes, some take rent cash in hand, or cram loads of people into a property – they’re not always keeping standards to the right level.”
But Hooker agrees that the taxation system is wrong: “The Government is trying to treat you as a business, without making you a business. That’s part of the problem – we need the benefits that businesses enjoy.”
At the same time, however, Hooker insisted: “Landlords need to get their act together – they don’t take their responsibilities seriously.”
Regarding section 24, he drew attention to the “other things to offset against your income, such as repairs”. He again insisted that landlords need to “become professional: treat your portfolio as a business, keep all of your paperwork”.
Shamplina noted in response: “Landlords have had it good for a long time – you’ve had ten to 12 years of cheap money.”
He then brought attention to the change in private rental sector sentiment from the Government, which moved more in favour of the tenant. Shamplina highlighted the 2015 Deregulation Act, which enforced a new section 21 notice for landlords.
“But happy tenants are happy landlords – they’ll stay in the property as long as possible, pay the rent on time and there are no voids,” he explained. “The focus needs to be more on tenants, as they pay a lot of money, so they need to live in safe properties.”
Shamplina then added: “The Government is doing a bad job on bigging up good landlords.”
Faulkner came in: “There should be a professional association for tenants – somewhere for them to learn all of their rights and become educated about how to find a good landlord or letting agent. I’m very encouraged that this will change with the regulation of all agents and landlords becoming members of redress schemes.”
Shamplina pointed out: “Tenants will stay longer if their property is managed by a letting agent,” to which Faulkner agreed: “There’s only a tiny chance of them being evicted if they’re with a regulated agent.”
Shamplina argued: “No landlord wants to evict a tenant for no reason – circumstances can change, and the biggest reason we see for evictions is rent arrears.”
Hooker picked up on the theme of change: “The whole market, the whole country, the whole world is shifting. The saying ‘the English never complain’ is true at my age, but generation X is different – they’re not happy with what they’re told they can and can’t do; it’s a throwaway world – if something doesn’t work, they moan. Complaints have risen over the past five/six years. Consumers are now in possession of power. The Government isn’t just picking on landlords – it’s now more acceptable to complain. We as landlords need to change with it.
“It’s good that the Government has actually recognised how important housing is to the UK, with the MHCLG and a minister for homelessness. The Government is listening, but we have big changes to make, we need to professionalise. Five years ago, the focus was on homeownership, but the same Government is shifting. We’ve done more work with the Government in the past 18 months. Remember that the Government isn’t controlling interest rates – we’ve had it very, very, very good. Now interest rates are starting to move up, but it’s still a competitive market. You need to be a salesman; make sure your properties are attractive, do a lot more, keep tenants for as long as you can, offer a service that is better than the landlords sitting next to you.”
Faulkner moved onto the lettings fee ban, which is expected in April next year.
Shamplina is on the tenant’s side: “Tenants have to pay a lot of money. They pay for reference and admin fees, as well as drafting the tenancy agreement. 20% of a letting agent’s income is admin fees, which shows that tenants are overcharged. I personally think that there should be a cap. Under the ban, agents will put their fees up, or landlords will self-manage. They can’t really put their fees up though, as landlords will walk away.”
Littlewood agreed: “They are being overcharged; letting agents are there to make money, but they’ve got to justify it. It’s horrendous – there’s a huge mark-up, something had to be done. From a tenant’s point of view, it’s too expensive to move, especially with deposits.”
However, Faulkner pointed out the “misunderstanding” that the Government has had regarding the ban: “It’s already happened in Scotland, so they just decided to introduce it here. It will wipe out the profitability of letting agents. Scotland was charging in different ways. There will be lots of redundancies, and those agents that fight for tenants may go, but, over five years, if 20-30% of agents go out of business, I have no problem if they’re the bad ones.”
But Hooker has had a different experience: “600 new letting agents joined the Property Redress Scheme in the last three months and the majority of those don’t charge tenants fees. We may lose a third of the market, but, where there is a void, new people come in – these new ones won’t charge fees, because their business models won’t be based on high levels of fees.”
Shamplina pointed out that landlords must look out for Client Money Protection (CMP) when instructing a letting agent.
Hooker explained CMP in more detail: “There are large swathes of letting agents that don’t have CMP and this means that, when you hand over a deposit or rent to them, if they knick the money or go bust, you lose. If you book a holiday, you look for ABTA or ATOL – CMP is the same for the lettings market. Two thirds of agents already have cover, but there are 8,000 that don’t. It’s likely that mandatory CMP will be introduced in April 2019. Before that, you must ask them if they have it.”
A member of the audience pointed out, however, that letting agents don’t just deal with tenant referencing. He believed that independent agents will simply move into sales when the fees ban is introduced, as it’s more profitable and there’s no ongoing property management. He was also concerned that, if landlords put their prices up, tenants may look elsewhere.
Faulkner was quick to respond: “If the rent is never put up, the landlord loses income over years, then the tenant has a shock that they have to pay more when going elsewhere. Nobody is doing anybody any favours by not changing the rate. When tenants leave, they’ll never be able to afford anywhere else in the same area, then the landlords get bad press.”
While Shamplina argued that tenants want security, he does believe that section 21 notices are essential – 40% of his company’s instructions are for section 21.
“If we withdraw that ability, it’ll be catastrophic,” he claimed.
Hooker agreed: “I don’t like entering any agreements that don’t give me a get-out clause. Withdrawing that would be a bad, bad move. I don’t think no fault evictions are as prevalent as we think – landlords are starting to sell properties because of regulations, but that’s because they’re not informed enough – it comes back to professionalism. Most landlords do want happy tenants. If they pay their rent, why would the landlord want to throw them out?”
Shamplina noted: “Last year, section 21s were down by 5,000 – they don’t report that on Panorama.”
He went on: “It would be rude not to talk about Brexit.”
Littlewood was quick to react: “I don’t think it will affect landlords – there’s a possibility of fewer tenants coming in from overseas, but the market will still be active.”
Faulkner disagreed: “It’s already affecting landlords – the HMO [House in Multiple Occupation] front is being hit hardest. And typically, with English tenants, you have more arrears. Demand is also falling dramatically.”
Hooker was more positive: “You don’t need to worry too much about a lack of tenants. Brexit will hurt every industry in the UK – it’ll be a shock to the economy, we’ll see it on the high street. For landlords, it may hit their pockets and interest rates will undoubtedly go up. There will be a period of time in transition where there’s less money, less positivity in the economy, more caution and a squeeze on rents.”
“Universal Credit will have a bigger effect than Brexit,” Littlewood stated.
Shamplina gave more information on the Government’s new welfare system: “It was first introduced four years ago and was a recipe for disaster. In 2008, direct payments to tenants were introduced, which were designed to empower them. Usually, tenants on housing benefit look after their property and stay longer. But now, their money is sucked up into personal debt, the landlord doesn’t get their money, the tenant may end up homeless and the landlord will never let to housing benefit claimants again.”
Littlewood agreed: “The principle to get people back to work is very good, but the implementation is appalling.”
What do you think of the professionals’ opinions on topical issues? And what has affected you the most?